Causal Change Detection in Possibly Integrated Systems: Revisiting the Money-Income Relationship

49 Pages Posted: 1 Sep 2018

See all articles by Shuping Shi

Shuping Shi

Department of Economics, Macquarie University

Stan Hurn

Queensland University of Technology - School of Economics and Finance

Peter C. B. Phillips

Yale University - Cowles Foundation; University of Auckland; University of Southampton; Singapore Management University - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 6, 2018

Abstract

This paper re-examines changes in the causal link between money and income in the United States over the past half-century (1959 - 2014). Three methods for the data-driven discovery of change points in causal relationships are proposed, all of which can be implemented without prior detrending of the data. These methods are a forward recursive algorithm, a rolling window algorithm and a recursive evolving algorithm all of which utilize subsample tests of Granger causality within a lag-augmented vector autoregressive framework. The limit distributions for these subsample Wald tests are provided. Bootstrap methods are developed to control family-wise size in the implementation of the recursive testing algorithms. The results from a suite of simulation experiments suggest that the recursive evolving window algorithm provides the most reliable results, followed by the rolling window method. The forward expanding window procedure is shown to have the worst performance. Both the rolling window and recursive evolving approaches find evidence of Granger causality running from money to income during the Volcker period in the 1980s. The forward algorithm does not find any evidence of causality over the entire sample period.

Keywords: Time-varying Granger causality, Subsample Wald tests, Money-income causality

JEL Classification: C12, C15, C32, E47

Suggested Citation

Shi, Shuping and Hurn, Stan and Phillips, Peter C. B., Causal Change Detection in Possibly Integrated Systems: Revisiting the Money-Income Relationship (June 6, 2018). Macquarie University Faculty of Business & Economics Research Paper. Available at SSRN: https://ssrn.com/abstract=3237213 or http://dx.doi.org/10.2139/ssrn.3237213

Shuping Shi (Contact Author)

Department of Economics, Macquarie University ( email )

New South Wales 2109
Australia

Stan Hurn

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
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Brisbane, Queensland 4001
Australia
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+61 7 3864 1500 (Fax)

Peter C. B. Phillips

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
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203-432-5429 (Fax)

University of Auckland ( email )

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Auckland
New Zealand
+64 9 373 7599 x7596 (Phone)

University of Southampton

Southampton, SO17 1BJ
United Kingdom

Singapore Management University - School of Economics

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178903
Singapore

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